Saturday, November 29, 2008

The 3Cs of Business Plan

[NOTE: An abridged version of this post was published by the Business Times (Singapore) on Nov. 17. ]

One question I’m asked most frequently by budding young entrepreneurs is, “What does an investor look for in a business plan?” I get asked this in my various capacities – as an entrepreneurship educator, as the director of NUS Entrepreneurship Centre, which provides seed funding to entrepreneurial start-ups by NUS professors, students and alumni, and as an active business angel investor, having invested in about a dozen start-ups in Singapore, Silicon Valley, China and India over the last decade or so.

There are of course literally thousands of how-to books about business plan writing that will offer you checklists on what a business plan should cover. Having been pitched business plan hundreds of times, I have learned to distill the essence of what I personally look for in a business plan down to three core questions, which I have dubbed the 3 C’s. Just as many of you have heard of the 4 P’s of marketing (product, price, place and promotion), I hope that many of you will remember the 3 C’s of start-up investing after reading this -- whether you are (or plan to be) an investment professional evaluating start-up business plans, or an entrepreneur pitching plan to investors.

So what are the 3 C’s? Here they are:

How does the venture CREATE value ?
How does the venture CAPTURE value ?
How does the venture COMMUNICATE value?

At the heart of any new venture is the identification of a potential opportunity, and a plan of actions to exploit it. So any good business plan must tell us how good the opportunity is, and how and why the people behind the plan can exploit it better than others. I believe the 3 C’s help discipline our thinking about the opportunity and its exploitation, by providing three sets of tests for the viability of any proposed business.

Value CREATION

Every business, no matter what it does, can only exist because it creates value for some customers. So the opportunity that a business plan seeks to exploit must be translatable into very specific answers to the following series of questions:

• What is the customer problem (“pain”) or need that you have identified ?
• How big is it – how many such customers are there ?
• Who will pay for it to be solved/fulfilled, and for how much?
• What specific products/services are you going to offer to solve/fulfil these pains/needs?
• By how much would the value of these products/services exceed the total cost of providing the solution?

I’m afraid that many business plans that I have come across fail to pass even this first test – while they talked about the wonderful technical inventions or business ideas they have discovered, they either failed to demonstrate the existence of real paying customers who will want to pay for them, or they did not take into account the full cost of converting their ideas into actually usable products, which will render the venture financially non-viable.

Value CAPTURE

Many entrepreneurs, particularly techies, think that they have a viable business just because they have developed something that people actually want. Unfortunately, this is often not true, because you may not be able to capture much of the value that you create due to the existence of competition. And competition comes from not just other companies offering similar products or services – as Michael Porter has summarized it nicely, there are five sources of competitive pressures that any business needs to watch out for:

• Existing Rivals offering similar products
• Potential New Entrants
• Close Substitutes
• Powerful Buyers
• Powerful Suppliers

In combination, these competitive pressures drive your price down, or squeeze your margins to nothing. To pass the value capture test, a business plan needs to (a) convincingly show why some of these competitive forces are absent (AND will remain so even after you have entered the market) ; or (b) clearly identify the unique competitive advantages that your venture has to counter each of these competitive forces.

It is usually a bad idea for a business plan to proclaim that there is no competition, as many na├»ve business plans do. To the experienced investor, this may mean either that the entrepreneur has not done his/her homework, or that the business opportunity is actually non-existent or so tiny that nobody else bothers to enter. From an investor’s perspective, the existence of competition is actually a good thing, for it provides a validation that the market potential is real, not imagined. The challenge is for the entrepreneur to show that his/her offering is so good that it can capture a viable market share, despite the competition.

Value COMMUNICATION

Even after a business plan has passed the above two tests, we are still not home free yet – there is the remaining test of how the venture can communicate its value convincingly to its customers and resource partners. This is of particular concerns for new start-ups trying to offer radically new products/services that are not familiar to the customers.

First of all, there is the liabilities of newness – if the new venture needs to sell to large enterprises (or to sell through large distribution channels), this is usually a big warning sign, for many of these establishments tend to be conservative and will not buy from an unknown entity with no prior track-records, no matter how good the product is. Secondly, when the product/service itself is novel, as is typically the case with new start-ups trying to commercialize new technologies or business ideas, a lot of educating of the users (as well as the relevant partners such as component suppliers and sales channels) is usually needed, which will not only raise the upfront cost, but also delay the revenue stream.

While the above examples highlight the go-to-market challenge, I have used the word communication to embrace the broader range of credibility and visibility challenges that a new venture needs to address – you may have a great product innovation, but unless people are aware of it, understand what it does, and have trust in your organization to deliver it, there will be great resistance to first adoptions – everybody is waiting for other credible reference customers to prove its viability first. What is worse, if your innovation disrupts the existing business ecosystem and requires new distribution channels or adaptations by existing suppliers, you are unlikely to get the complementary resources to help you get started. You will also have difficulty attracting top talent to join your venture if you cannot communicate a compelling vision to them.

Unless a business plan clearly addresses how it is able to overcome these value communication challenges – and still shows viability even after factoring these communication costs and time delays into its financial projection -- it is still not fundable even if it passes the earlier two tests. For example, I personally view more favourably a start-up plan that allocates stock options to attract credible people to join its board of directors and management team – besides showing that the venture is serious about attracting the right resources to enhance its execution capability, it also signals that the founders recognize the need to address its credibility challenges.

I use this 3Cs framework not only to screen business plan pitches, but also to monitor and advise the companies that I’ve invested in. I would be interested in any suggestion you have on how to refine it.

Friday, November 21, 2008

Global Entrepreneurship Week III

I managed to participate at 5 different events in the Week over the last 3 days, including speaking at 2 of them (the Microsoft BizSpark Launch and the BANSEA-Creative Community Singapore (CCS) Networking Event on Alternative Financing for Creative Businesses).

It is great to see Microsoft coming around to trying to work with early stage start-up companies, and I'm pleased that they have invited NUS Entrepreneurship Centre to be one of their network partners. While the free access to Microsoft software tools will certainly be very helpful, I believe one real beneifit for our Singapore-based start-ups would be to leverage their participation in BizSpark to gain regional and even global visibility. As a manifestation of Microsoft's power to draw media visibility, the event already gained coverage by Today, Channel News Asia Online, and Lianhe Zaobao, with more promised next week.

Although I have not yet invested in any "creative" businesses, this is not due to lack of interest on my part, just that I've not come across really interesting deal flows in this marketspace so far. Many entrepreneurial ventures in creative industries in Singapore have in the past tended to be run as social enterprises (depending largely on public grants/subsidies) or as lifestyle businesses that do not scale. But sensing that things may be changing, I took up the opportunity (as chairman of Business Angel Network Southeast Asia (BANSEA)) to co-organize the event with CCS as a way to get a better feel of the creative business entrepreneurial community in Singapore. I was pleasantly surprised by the high turnout -- over 100 participants -- and the level of energy during the informal networking. In my talk, I tried to highlight the need for creative business entrepreneurs to consider pursuing business models that are scaleable in order to make their businesses fundable by angel investors. I also highlighted some of the innovative financing methods that have been introduced in recent years in other countries (e.g. how a successful film production in Korea has received over 40% of its financing through micro-investments by online netizens) to encourage the creative business community to think more creatively about meeting its financing challenge. Through the event, besides meeting some very nice people, I've come to learned quite a bit about what CCS is doing to promote creative businesses in Singapore -- you can visit their website to learn more -- https://app.creativecommunity.sg/

The Technology Commercialization Forum (TCF) organized by the Industrial Liaison Office (ILO) of NUS Enterprise also drew a very high turnout (over 300 participants). I was particularly impressed by the keynote speech by the president of the Association of University Technology Managers (AUTM), where he made a passionate plea for policy makers to consider the long-term societal impacts of university technology commercialization, instead of focusing narrowly on licensing revenue generation in the short term. I truly agree with him that what really motivates some of us to do what we do (promoting innovation & entrepreneurship) is to try to make the world a better place. I would like to encourage you to read the Better World Project Reports recently produced by AUTM (downloadable from http://www.betterworldproject.net/reports.cfm) which provide interesting examples of university innovations that have truly made a significant impacts on the world.

Wednesday, November 19, 2008

Global Entrepreneurship Week II

The Global Entrepreneurship Week (GEW) has started this week. I have attended two of the many events organized in Singapore so far -- the World Cafe organized by Temasek Polytechnic on the first day, and the Opening Ceremony on the second day. As my centre is one of the co-organizers of GEW Singapore, I'm particularly pleased that the Kauffman Foundation has chosen Singapore as one of the selected countries outside USA/UK that they will give on the ground coverage. In fact, they actually sent two people to participate in Singapore's Opening Ceremony -- Jonathan Ortmans, the man in charge of the GEW world-wide, and Dr. Paul Kedrosky, who is doing videoblogging of GEW happenings in selected countries worldwide. You can see his blog post on Singapore's GEW Opening Ceremony at the main GEW website http://unleashingideas.org/.

At the World Cafe, I enjoyed the opportunity to interact with the primary and secondary school kids as well as polytechnic students, especially hearing their views on what they think are the most important traits of an entrepreneur. We were also asked to discuss the question on whether entrepreneurs are born or made, which I didn't like so much -- for reasons I can't fathom, many people seem to like to ask this question. Interestingly, the topic that seemed to have generated the most amount of participation among the kids (at least in the tables where I participated) was that of parents' reluctance to let their kids try anything entrepreneurial that detracts from their study, and the pressure on the kids to study hard and get a good job.

I was happy to note that there were quite a few new faces at the Opening Ceremony. I think it is important that our activities reach out to new people -- there is no point to keep preaching to the converted.

I am looking forward to attending more events during the rest of the week. In particular, I think the Speednetwork The Globe, organized by The Digital Movement (TDM) in Singapore, seems interesting and worth checking out -- visit www.thedigitalmovement.org/gew.

Monday, November 3, 2008

Global Entrepreneurship Week

The inaugural Global Entrepreneurship Week (GEW) will take place in the week of 17-23 Nov. 2008. Jointly coordinated by Kauffman Foundation in the US and Make Your Mark in UK, the goal of the week-long program is to encourage people from around the world to celebrate the spirit of innovation, entrepreneurship and creativity during one common week every year. To-date, organizations in 78 countries from around the world have committed to host a wide variety of events and activities during this inaugural GEW week.

I applaud this global campaign to raise awareness and interest in entrepreneurship, and am pleased to say that my centre (The NUS Entrepreneurship Centre) has taken the initiative to jointly host GEW in Singapore with the Action Community for Entrepreneurship (ACE). Together, we have engaged 35 other partner institutions to organize more than 40 events and activities throughout the GEW week. You can check out the latest GEW happenings in Singapore at this website -- http://entrepreneurshipweeksg.org. You can also find out what other countries are doing at this global website -- www.unleashingideas.org. A number of experimental global flagship events will take place to enable people from around the world to participate in simultaneously, including "Speednetwork the Globe" and the "Global Innovation Tournament".

Like any start-up idea, this year's inaugural GEW will probably be somewhat experimental and unpolished, but I believe that GEW truly has the potential to become not only THE annual platform for nations to celebrate the spirit of entrepreneurship in their respective countries, but also to emerge as an interesting global virtual platform for new entrepreneurial ideas from anywhere in the world to be paraded and tested on a global scale. I would therefore like to urge you to give this new initiative your support by attending events in your country that interest you, and by tuning in to the global website to see what is happening around the globe and blogging about them. More importantly, I encourage you to see the GEW as your opportunity to make your mark on a global scale, by unleashing new social networking ideas and novel events/games/activities that will capture the imagination and interest of the millions of entrepreneurially-minded people who will be tuning in from around the world. I look forward in particular to your suggestion on how my centre and ACE can work with you to launch your ideas in this and future GEW, not just in Singapore, but also to the world.